1. August 2011, Volume II, Issue VIII Published by Novogradac & Company LLP
News, Analysis and Commentary On Affordable Housing, Community Development and Renewable Energy Tax Credits
continued on page 2
T
he new markets tax credit (NMTC) industry has been
abuzz in recent months over recent proposals by the
Treasury Department to ease restrictions on invest-
ments in non-real estate qualified active low-income commu-
nity businesses (QALICBs). The proposed regulation defines
a non-real estate QALICB as any business whose predomi-
nant business activity does not include the development,
management or leasing of real property.
While the proposed regulations may make investments in
non-real estate businesses more common, NMTC profes-
sionals are not waiting for regulatory relief and are forging
ahead with innovative structures to increase small business
investments. One such structure, which Emmet, Marvin &
Martin LLP has been proud to help pioneer, is the twinning
of the Small Business Administration’s (SBA’s) 7a loan guar-
anty program with NMTCs.
Under the 7a program, SBA-approved lenders can make
loans guaranteed by the SBA. Depending on the type of loan
(which currently can be as much as $5 million), the SBA may
guaranty between 75 and 90 percent of the loan’s principal
amount. These benefits generally translate into reduced in-
terest rates for borrowers, reduced risked for lenders, and
more lending overall.
Once a 7a loan is made, a 7a borrower may use the pro-
ceeds for a variety of business purposes, including the es-
tablishment of a new business or the acquisition, operation
or expansion of an existing business. To this end, 7a loans
are often used to purchase real property, to finance the con-
struction or expansion of existing facilities, or to purchase
fixtures, furniture, equipment or inventory.
In a twinned NMTC/7a program transaction, a CDE that is
also an SBA lender uses NMTC equity and financing through
the traditional “leveraged loan” model to make loans to vari-
ous 7a-qualified small businesses. This has the added benefit
of aggregating structuring costs and increasing tax credit ef-
ficiency. Alternatively, a CDE with an available allocation of
NMTCs may utilize its qualified equity investment (QEI) to
make a loan to another CDE that is an SBA-approved lender.
This model is are reflected in the illustration on page 52, and
serves to utilize investor equity to increase the total dollar
amount of small business loans deployed.
As is always the case when twinning NMTCs with other
federal or state programs, it is important to understand the
various requirements of each program. Accordingly, the fol-
lowing outlines several legal and practical considerations for
structuring these types of transactions.
CDE and 7a Certification
Any lender originating a 7a loan must be SBA approved. A
CDE making a loan to an SBA lender need not have SBA ap-
proval; however the SBA lender originating the 7a loans will
need to be a CDE. The reason for the latter requirement is
that under the NMTC’s “nonqualified financial property
test” investments in entities that hold substantial debt in-
struments do not constitute qualified low-income commu-
nity investments (QLICIs). However, loans by CDEs to other
CDEs are permitted QLICIs. This may seem academic, but
situations abound in which multiple CDEs will be needed to
make a transaction work.
Twinning NMTCs with SBA 7a Loans: Legal and
Practical Considerations
By Eric Usinger, Emmet, Marvin & Martin LLP

2. continued from page 1
Long Term Loans
Loans under the 7a program often have terms of up to 25 years. If a
leverage lender has entered the deal to finance the credit relation-
ship with particular 7a borrowers, then it may not mind remaining
in the deal beyond the NMTC’s seven-year compliance period. If,
however, the leverage lender’s sole interest is to leverage tax credit
equity, then it will likely expect full repayment in seven years. In
such cases, the leverage lender’s credit risk will be determined by
the SBA lender’s ability to generate sufficient cash flow to allow
the leverage loan to be repaid in seven years. Thankfully, owing to
strength of the SBA’s guaranty, there is a healthy secondary market
for 7a loans. Nevertheless, it may be necessary to educate the lever-
age lender on these issues.
7a Loans are Fully Amortizing
All 7a loans must fully amortize and, in most cases, prepayment
penalties are prohibited in all but the first three years. These re-
quirements will inevitably conflict with the requirement that sub-
stantially all of an investor’s QEI remain invested in a QLICI for
seven years. In this regard, the proposed regulatory changes may
provide some relief as the Treasury is considering alternative ways
in which QLICIs in non-real estate QALICBs may be reinvested.
In the meantime, a practical solution is to require the establish-
ment of a sinking fund to capture principal payments as they are
made, to be reinvested once a certain threshold is met. This may
be as simple as moving the investment into the next project if the
SBA lender has a healthy loan pipeline (focused on low-income
communities). Alternatively, under the safe harbor method for cal-
culating the substantially all test, it is possible for a CDE to create
built-in “buffer” protection by making one or more extra qualify-
ing loans to QALICBs, in excess of the amount needed to satisfy
the substantially all test, and to count those additional loans to-
ward the total QLICI.
SBA Limitations on Loan Assignments
The SBA generally allows collateral assignments of its guarantees,
provided the SBA-approved lender retains an unguaranteed in-
terest of not less than 10 percent of the loan and the SBA retains
the right to deal solely with the SBA-approved lender. This may
cause complications in deals in which the CDE has made a loan to
a third-party SBA lender. Notwithstanding a default by the SBA
lender in its obligations to the CDE, the CDE may nevertheless be
required to continue working with the SBA lender as a minority
participant and servicer for the 7a loans. Therefore, both the CDE
and leverage lender may need to get comfortable with the SBA
lender’s industry track record, financial plan, lending standards
and business model.
Cost Savings Limited by Investor Requirements
Although there will be great cost savings in structuring a multi-
Novogradac Journal of Tax Credits
Editorial Board
PUBLISHER
Michael J. Novogradac, CPA
MANAGING EDITOR
Alex Ruiz
EDITOR
Jane Bowar Zastrow
TECHNICAL EDITORS
Robert S. Thesman, CPA
James R. Kroger, CPA
Owen P. Gray, CPA
Thomas Boccia, CPA
Daniel J. Smith, CPA
ASSIGNMENT EDITOR
Jennifer Dockery
STAFF WRITER
Jennifer Hill
CONTRIBUTING WRITERS
Brandi Day
Brad Elphick
Kristina Garcia
Owen P. Gray
John Leith-Tetrault
Forrest David Milder
Lisa Pekkala
Charlie A. Rhuda III
Martin Ricketts
Daniel J. Smith
Tom Stephens
Amanda Talbot
John Tess
Eric Usinger
Tara M. Woody
Miao Xue
PRODUCTION
Jesse Barredo
James Matuszak
Novogradac Journal of Tax Credits
Information
Address all correspondence and
editorial submissions to:
Alex Ruiz/ 415.356.8088
Address inquiries regarding
advertising opportunities to:
Emil Bagalso / 415.356.8037
Editorial material in this publication is for informational
purposes only and should not be construed otherwise.
Advice and interpretation regarding the low-income
housing tax credit or any other material covered in this
publication can only be obtained from your tax advisor.
© Novogradac & Company LLP
2011 All rights reserved.
ISSN 2152-646X
Reproduction of this publication in whole or in part in any
form without written permission from the publisher is
prohibited by law.
continued on page 3
www.novoco.comAugust2011
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3. continued from page 2
Novogradac Journal of Tax Credits
Advisory Board
LOW-INCOME HOUSING TAX CREDITS
Bud Clarke BOSTON FINANCIAL INVESTMENT MANAGEMENT
Jana Cohen Barbe SNR DENTON
Tom Dixon BOSTON CAPITAL
Valerie White STANDARD & POOR’S CORPORATION
Rick Edson HOUSING CAPITAL ADVISORS INC.
Richard Gerwitz CITI COMMUNITY CAPITAL
Rochelle Lento DYKEMA GOSSETT PLLC
John Lisella U.S. BANCORP COMMUNITY DEV. CORP.
Phillip Melton CENTERLINE CAPITAL GROUP
Thomas Morton PILLSBURY WINTHROP SHAW PITTMAN LLP
Stephen Ryan COX, CASTLE & NICHOLSON LLP
Arnold Schuster SNR DENTON
Rob Wasserman U.S. BANCORP COMMUNITY DEV. CORP.
PROPERTY COMPLIANCE
Rose Guerrero CALIFORNIA TAX CREDIT ALLOCATION COMMITTEE
Sharon Jackman SIG SERVICES LLC
Michael Kotin KAY KAY REALTY
Michael Snowdon MCA HOUSING PARTNERS
Gianna Solari SOLARI ENTERPRISES
Ruth Theobald Probst THEOPROCOMPLIANCE&CONSULT.INC.
Kimberly Taylor HOUSING DEVELOPMENT CENTER
HOUSING AND URBAN DEVELOPMENT
Sheldon Schreiberg PEPPER HAMILTON LLP
Monica Sussman NIXON PEABODY LLP
NEW MARKETS TAX CREDITS
Frank Altman COMMUNITY REINVESTMENT FUND
Bruce Bonjour PERKINS COIE LLC
Neil Kimmelfield LANE POWELL
Marc Hirshman U.S. BANCORP COMMUNITY DEV. CORP.
Scott Lindquist SNR DENTON
Ruth Sparrow FUTURES UNLIMITED LAW PC
Herb Stevens NIXON PEABODY LLP
Mary Tingerthal HOUSING PARTNERSHIP NETWORK
Tom Tracy HUNTER CHASE & COMPANY
Joseph Wesolowski ENTERPRISE COMMUNITY INVESTMENT INC.
HISTORIC TAX CREDITS
Don Holm FARRIS BOBANGO BRANAN PLC
John Leith-Tetrault NATIONAL TRUST COMM. INVESTMENT CORP.
Bill MacRostie MACROSTIE HISTORIC ADVISORS LLC
Donna Rodney BRYAN CAVE LLP
John Tess HERITAGE CONSULTING GROUP
RENEWABLE ENERGY TAX CREDITS
Ed Feo USRG RENEWABLE FINANCE
Michael Hall BORREGO SOLAR SYSTEMS
Jim Howard DUDLEY VENTURES
Forrest Milder NIXON PEABODY LLP
Darren Van’t Hof U.S. BANCORP COMMUNITY DEV. CORP.
continued on page 4
loan facility, the tax credit investor will still want a minimum level
of NMTC due diligence in connection with each 7a loan originat-
ed. This may include an accountant’s agreed upon procedures re-
port with respect to each 7a loan, a QLICI opinion letter for each 7a
loan, and a QALICB certification from each 7a borrower.
Borrower Qualifications
Each 7a borrower must satisfy the SBA’s requirements and, during
the entire NMTC compliance period, be a QALICB. Although sev-
eral of the requirements for 7a loan eligibility overlap with NMTC
program requirements, the 7a program has additional criteria.
Notably: all 7a businesses must satisfy the SBA’s definition of a
“small” business, only for-profit businesses constitute eligible bor-
rowers (non-profits cannot obtain a 7a loan), the leasing of real
property does not constitute a qualified 7a business, certain busi-
nesses promoting religious activities are ineligible, and consumer
and marketing cooperatives are generally ineligible.
At the end of the day, the success of an NMTC transaction twinned
with 7a loan guaranty benefits will be wholly dependent on the
strength of the SBA lender’s ability to locate, secure and deploy
small business loans to low-income community businesses. Nev-
ertheless, a well-structured and underwritten transaction can be
successful in furthering the NMTC program’s goal of creating jobs
and stimulating investment in low-income communities.
NMTC
Investor
Leverage
Lender
7a Borrower/
QALICB #1
$1,500,000
Equity Investment
$5,000,000 Qualified
Equity Investment
$3,500,000
Loan
New Markets
Tax Credits
New Markets
Tax Credits
Allocation of
New Markets
Tax Credits
Guaranty of up
to 90% of loans
$5,000,000
Loan*
$1,500,000
7a Loan
$2,000,000
7a Loan
$500,000
7a Loan
$1,000,000
7a Loan
Assignment of
SBA Guaranty*
7a Borrower/
QALICB #2
7a Borrower/
QALICB #3
7a Borrower/
QALICB #4
Community Development
Entity (CDE)
CDFI
Fund
7A Loan/NMTC
Investment Fund
SBA Approved Lender*
and certified CDE
* Note:The loan made to the SBA approved lender is an optional step. If the CDE holding the
allocation of NMTCs is itself an SBA Approved Lender, then the CDE may act as lender to each
of the QALICBs. In this case, the SBA would make its guaranty directly to the CDE.
Source: Eric Usinger; Novogradac & Company LLP
www.novoco.comAugust2011
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4. continued from page 3
This article first appeared in the August 2011 issue of the Novogradac Journal of Tax Credits.
© Novogradac & Company LLP 2011 - All Rights Reserved
Notice pursuant to IRS regulations: Any U.S. federal tax advice contained in this article is not intended to be used, and cannot
be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code; nor is any such advice intended
to be used to support the promotion or marketing of a transaction. Any advice expressed in this article is limited to the federal
tax issues addressed in it. Additional issues may exist outside the limited scope of any advice provided – any such advice does
not consider or provide a conclusion with respect to any additional issues. Taxpayers contemplating undertaking a transaction
should seek advice based on their particular circumstances.
This editorial material is for informational purposes only and should not be construed otherwise. Advice and interpretation re-
garding property compliance or any other material covered in this article can only be obtained from your tax advisor. For further
information visit www.novoco.com.
Eric Usinger is a senior associate at Emmet, Marvin & Mar-
tin LLP and specializes in transactions using LIHTCs and
NMTCs. For more information, please contact Eric Usinger at
(212) 238-3165 or eusinger@emmetmarvin.com.
www.novoco.comAugust2011
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NOVOGRADACJOURNALOFTAXCREDITS